The Financial Conduct Authority (FCA) has published new rules and guidance on the promotion to retail investors of Unregulated Collective Investment Schemes (UCISs), and certain other schemes it deems similar (now collectively defined as non-mainstream pooled investments (NMPIs)). As a result, from 1 January 2014, the only retail investors to whom NMPIs may be promoted will be high net worth individuals (HNWIs) and those who qualify as sophisticated investors.
Following concern that ordinary retail investors were receiving promotions of, and were consequently investing in, unregulated products which the Financial Services Authority (FSA) (the FCA’s predecessor) deemed unsuitable for them the FSA published a Consultation Paper on the issue in August 2012. The Consultation Paper proposed amendments to the existing rules regarding the promotion of UCISs and sought the views of interested parties.
Having considered the responses to the Consultation Paper the FCA has issued a Policy Statement in which it has announced that it is expanding its restriction on promotions to cover all NMPIs. In addition it is creating a new set of exemptions to the financial promotion restrictions to ensure that such investments are not made available to “ordinary” retail investors. The Policy Statement also clarifies and provides guidance on the promotion of NMPIs generally.
The new rules
The scope of the restrictions on financial promotion is to be expanded to cover not just UCISs but all schemes falling within the new NMPI definition. Included in the NMPI definition are UCISs, qualified investor schemes (QISs), traded life policy investments and SPVs pooling investment into assets (other than listed or unlisted shares or covered bonds) and any options or interests in any of these instruments. Specifically excluded from the NMPI definition are exchange traded products, enterprise investment schemes (EISs) and venture capital trusts (VCTs). The FCA has however said it will continue to monitor the market and may add additional pooled investments to the definition of NMPIs in the future.
Changes to the existing rules
Under the existing rules, UCISs (collective investment schemes which, although subject to limited regulation as to their promotion and operation, are not themselves regulated by the FCA) can be promoted to specific limited categories of investor including those falling within one of the exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (CIS Order)/Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (FPO Order) or, where the promotion is carried out by an FCA authorised firm, to retail investors who meet the criteria in chapter 4.12 of the Conduct of Business Sourcebook rules of the FCA Handbook (COBS 4.12). The COBS 4.12 categories include promotions to (i) existing UCIS participants (category 1), (ii) advised investors for whom the advising firm deemed the UCIS to be suitable (category 2) and (iii) investors who have the expertise, experience and knowledge to be capable of making their own investment decisions (category 8).
The new rules remove the existing exemptions contained in COBS 4.12, including those in categories 1, 2 and 8, and replace them with a new set of exemptions. The new provisions allow for promotions of NMPIs by FCA authorised firms to certified HNWIs (investors who have an annual income of at least £100,000 or investible net assets of at least £250,000) and to certified or self-certified sophisticated investors (broadly, investors with the knowledge and experience to understand the relevant investment risks). Where a promotion is to be made to a certified HNWI or a self-certified sophisticated investor the firm must also consider the investment to be suitable having assessed the investor’s profile and objectives. The new rules therefore remove the ability of FCA authorised firms to promote NMPIs to “ordinary” retail investors who will lack the necessary financial experience.
Given their complexity the new rules will only formally come into effect on 1 January 2014. Whilst this time frame is designed to give firms time to arrange for implementation, the Policy Statement encourages firms to comply as soon as practicable in order to minimise the risk that ordinary retail investors invest in unsuitable schemes.
Impact on real estate funds
An unauthorised real estate fund will usually constitute a UCIS. Under the existing financial promotion rules, the exemptions contained in the CIS Order and FPO Order for retail investors are contingent on the relevant UCIS investing in unlisted companies (i.e. not real estate). As a result, promoters of real estate funds have commonly relied on the COBS 4.12 exemptions. FCA authorised promoters of such funds will continue to be able to promote them to retail investors but only if they are HNWIs or sophisticated investors. As noted above, they will also have to assess the suitability of the investment in the context of the client’s financial objectives.
The new rules will be relevant to all sponsors, fund managers, promoters, financial advisers and brokers involved with NMPIs. The FCA believes that firms have misunderstood and misinterpreted the existing financial promotion rules and have failed to correctly assess the suitability of UCISs and other investment products for retail investors. The Policy Statement and new rules are designed to address these failings. The reactions from the funds industry to these latest rules have been mixed. However, they clearly indicate a regulatory appetite for a more interventionist approach.
 FSA CP12/19: Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes
 FCA PS13/3: Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes
Charles Proctor, Partner, Fladgate LLP (firstname.lastname@example.org)
Ella Leonard, Partner, Fladgate LLP (email@example.com)
Edward Morgan, Senior Associate, Fladgate LLP (firstname.lastname@example.org)